What is Economic Growth?

Economic growth is the increase in the quantity of goods and services produced by an economy within some period. It is conventionally that this measure of GDP increase considering in percentage. Growth is usually calculated in real terms, ie in terms adjusted for inflation in the prices of goods and services produced. In economics, “economic growth” or “economic growth theory” typically refers to the growth of potential output, that is, “full employment” production, which is caused by growth in aggregate demand or observed output. As a field of study, economic growth is usually distinguished from the development of economy. The sense is mainly in the study in which countries can promote their economies.

Short-term stabilization and long-term growth

Economists distinguish between short-term economic stabilization and long-term economic growth. The topic of economic growth is mainly concerned with the long run.

– The short change in economic growth is called the business cycle, and almost all economies experience periodically. The cycle may be a mistake as fluctuations are not always the usual. The explanation of these fluctuations is one of the main focuses of macroeconomics. There are different thoughts on the causes of withdrawals in some consensuses, the new classical economy and the new Keynesian economy. Oil shocks, war and failure to harvest are obvious causes of withdrawal. The short variation in growth, usually in higher income countries since the early 1990s, has been attributed in part to better macroeconomic management.

– The long-term path of economic growth is one of the central questions of the economy; Despite the problems of measurement, an increase in a country’s GDP is generally taken as an increase in the standard of living of its inhabitants. Over long periods of time, even small annual growth rates can have great effects on composition.

The Concept of Classical Growth Theory

The modern concept of economic growth began with the critique of Mercantilism, especially by Physiocrats and Scottish thinkers such as David Hume and Adam Smith, and the foundation of the discipline of modern political economy. The Physiocrats theory was that productive capacity if even, took into account growth, and improvement and capital increase to enable capacity to be “the prosperity of nations.” While they stressed the importance of agriculture and saw urban industry as “sterile,” Smith extended the notion that manufacturing was central to the entire economy.
David Ricardo would then argue that trade was a boon to a country, because if one can buy a good cheaper from abroad, it meant that there was more lucrative work to be done. This theory of “comparative advantage” would be the central basis of arguments in favor of free trade as an essential component of growth.
The per capita yield was essentially a matter to the industrial revolution. This period of time is called the Malthusian period, since it was governed by the principles explained by Thomas Malthus in his “Second Essay on Population Principle.” In essence, Malthus said any growth in the economy would translate into population growth. Thus, while aggregate income may increase, per capita income has been tied to being roughly constant. The dominant theory of economic growth states that with the industrial revolution and advances in medicine, life expectancy increased, infant mortality declined, and the payment of wages upon receiving an education was higher. Thus, parents began to place more value on the quality of their children and not on quantity. This has led to a drop in the fertility rates of most industrialized nations. This is known as the depletion of the Malthusian regime. With output rising faster than population growth, industrialized economies substantially increased their per capita incomes over the next few centuries.

The neoclassical growth model

The notion of growth as increased capital stocks in commodities was coded as the Solow-Swan Growth Model, which implied a series of equations that demonstrate a relation between working time, capital goods, output, and investment . In this modern view, the role of technological change was crucial, even more important than the accumulation of capital. This model, developed by Robert Solow and Trevor Swan in the 1950s, was the first attempt to model analytically long-term growth. This model assumes that countries use their resources efficiently and decrease the return on capital and labor increases. Of these two premises, the neoclassical model makes three important predictions. First, capital increase in labor creates economic growth, Since we can be more productive given more capital. Second, poor countries with less capital per person will become faster because each investment in the capital will produce a higher return than rich countries with the broad capital. Third, because of the decline in the capital return, economies will consequently achieve a point at which no further increase in capital will create economic growth. This point is called a “steady state”. The economies will thus achieve a point at which no further increase in capital will create economic growth. This point is called a “steady state”. The economies will thus achieve a point at which no further increase in capital will create economic growth. This point is called a “steady state”.
The model also notes that countries can overcome this steady state and continue growing by inventing new technology. In the long run, per capita output depends on the economy rate, but the rate of output growth should be the same for any economy rate. In this model, the process by which countries continue to grow despite declining returns is “exogenous” and represents the creation of new technology that allows production with fewer resources. Technology improves, the steady state level of capital increases, and the country invests and grows. The data do not support some predictions from this model, especially that all countries grow at the same rate in the long run, or that the poorer countries must become faster until they get their steady state. Also,

New Growth Theory

The theory of economic growth advanced again with the theories of economist Paul Romer until the late 1980s and early 1990s. Other important new growth theorists include Robert E. Lucas and Robert J. Barro. Dissatisfied with the explanation Solow, economists developed the endogenous growth theory that includes a mathematical explanation of technological advancement. This model also incorporated a new concept of human capital, the skills and knowledge that make employees productive. Unlike physical capital, human capital has the increasing return on tariffs. Therefore, there is usually constant return in the capital, and economies never achieve a steady state. Growth does not slow down as capital accumulates, but the rate of growth depends on the types of capital in which a country invests. Research in this area has focused on human capital growth (eg education) or technological change (eg innovation).